China takes center stage for currency markets this week, and not just because of the doubling of tariffs that went into effect on Tuesday. China’s legislature holds a key meeting through the course of the week, and is expected to make some key economic announcements. Then on Friday is the release of China’s trade balance, the first since the tariffs were implemented.
All of this after the Asian giant reported February PMIs coming in above expectations and returning to expansion. It was the fastest increase in manufacturing in three months, giving a signal that China is starting the year on a positive footing. The question now is whether that will persist through the rest of the year, which is necessary to keep supporting commodity currencies.
The Tariff Pressure
The thought among many economists is that tariffs will slow down exports from the world’s largest manufacturing center, which would weigh on the economyand impact the forex market. But, China’s domestic policy could be used to counteract those effects. In fact, some argue that the recent upping of tariffs means it is more likely that the National People’s Congress (NPC) will announce more stimulus measures.
The PMI measures posted on Monday showed that new export orders rose at the fastest rate in nearly a year. While that might be a sign of strong demand, it could also be a product of importers stocking up ahead of the implementation of tariffs. China responded to US President Trump’s latest salvo of tariffs with reciprocal levies of 10-15% on American agricultural goods. Some analysts speculate that the US will have to ramp up tariffs significantly more to have a big enough impact on the Chinese economy to force concessions from Beijing.
The Reaction and Outlook
As a sign of the impact of the trade policy, Chinese stocks were largely unmoved following the implementation of the latest round of tariffs. Analysts in China suggest that the tariffs are not a big deal, that the economy is already recovering, and growth will be determined by internal factors.
We’ll get some insight into whether the government agrees with this assessment during the course of the NPC. Aside from potentially announcing new stimulus measures, it’s expected to also provide a growth target for the country for this year. International economists believe China’s economic growth will moderate this year, but that the government will once again set a 5.0% growth target. That could help reassure markets that the world’s second largest economy will continue its upward trajectory.
The Data Tells the Story
Friday sees the release of China’s trade balance. The stated purpose for Trump’s trade war is to reduce fentanyl imports into the US and close the trade deficit with China. But the first month is expected to see a widening of the trade gap as importers rush to get ahead of tariffs – in fact, this trend is contributing to forecasts of slower GDP growth in the US in the very short term.
China’s trade surplus is expected to rise to $120 billion from $105 billion in January. Exports are projected to grow at a strong 10.0% in line with the 10.7% prior. But what could be more relevant to commodity currencies is that imports are expected to accelerate too, to hit 3.0% grom compared to 1.0% prior.
